Cash Flow Forecasting

Chapter 5

Cash flow forecasting of

project finance

Introduction

In the previous section we looked at how to build projected financial

statements based on historical financial statements, and in turn use the

cash flow statement generated by the spreadsheet to undertake an

analysis about the borrower’s future ability to repay credit facilities. This

exercise in turn entailed mastering various supporting component tech-

niques such as net sales projections, historical averages of ratios, manip-

ulating ratios, constructing debt runoff schedules, and making assumptions

about allocation of new money needs. All this is useful when looking at

a company with a historical track record.

There are other scenarios, however, that require cash flow projection

techniques – for example, a merger of two companies, or the case of cre-

ating a special purpose vehicle to build a large-scale construction pro-

ject such as a metro system, airport, road or dam. Here we are also

interested in the use of projections, for example in understanding the

future condition of an entity that a lender may be presently considering

extending finance to. In this case, the key importance in preparing pro-

jections is not only to assess the inherent credit risk but also how to

enhance that risk due to judicious structuring of the financing facility

and identification of negotiating points to enhance that security further.

The underlying data and focus of this analysis will therefore be quite

unlike that in the preceding chapter, and the analytical and construction

techniques will be significantly different.

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